Salesforce.com Tumbles on Billings Concerns

Friday Nov 18th 2011 by Thor Olavsrud

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The cloud-based CRM provider beat Wall Street expectations, but some analysts are questioning whether it has lost its technological edge.

Despite revenue and earnings per share (EPS) that came in well ahead of expectations, the share price of cloud-based customer relationship management (CRM) provider Salesforce.com tumbled 10 percent Friday. Analysts are pointing to customer billings, which came in shy of expectations, as the reason for the pummeling.

Salesforce.com (NYSE: CRM) announced its fiscal third quarter 2012 results after the bell on Thursday. It reported total revenue of $584 million, beating the Street's estimate of $571.5 million and its own guidance of $568 million to $570 million. Its subscription and support revenues also grew 36.3 percent year-over-year to $549 million, and professional services grew 34.2 percent over the same period to $35 million. EPS came in at $0.34, ahead of Wall Street's estimate of $0.31.

But in spite of the good news on those fronts, it was calculated billings where Salesforce.com disappointed. The company recorded billings of $566.8 million, or 28.6 percent year-over-year growth. But Wall Street was looking for $586 million.

"This metric will be disappointing to investors, given that it represents the third straight quarter of billings deceleration, particularly in the quarter where Dreamforce generated so much seeming momentum," wrote analysts Tom Roderick and Gur Talpaz of Stifel Nicolaus. "While we continue to believe that Salesforce had a very solid quarter, particularly in North America, it certainly seems possible that European volatility, coupled with off-balance sheet movements, were the likely culprit behind the lower-than-expected figure. Regardless, the fourth quarter guidance for approximately 30 percent year-over-year deferred growth (implying about 33 percent year-over-year billings growth) should help to boost confidence in the coming quarter, and the strength of the overall business."

The company said it expects its deferred revenue to grow 30 percent year-over-year in the fourth quarter of fiscal 2012, which Roderick and Talpaz said implied 32 percent to 33 percent billings growth.

"We are impressed with this figure, given the particularly tough comps the company faces each Q4, and believe that the company's willingness to provide such an outlook is a direct effort at combating concerns surrounding deceleration," they said. "While we don't necessarily see this as being enough to offset disappointment from the company's F3Q12 results, we nevertheless believe that this guidance should provide some cushion during the quarter and should reduce investor fears surrounding the sustainability of the company's business growth."

Other analysts, however, do not see the future as particularly rosy for the once high-flying Salesforce.com. Trip Chowdhry, managing director of Equity Research at Global Equities Research, which downgraded Salesforce.com to equal weight Friday, said the company is not well positioned to ride the next wave of technological and behavioral shifts.

"Salesforce.com has bet its farm on multitenancy," Chowdhry wrote, referring to a principle in software architecture in which a single instance of software runs on a server that serves multiple client organizations, or tenants. "However, the enterprise customers are seeing limitations of the multitenancy approach and have started to prefer a self-contained and isolated virtual machine over the multitenancy approach. Google and Oracle have started to change the customer's expectations regarding the data with 'Data Liberate' and 'Data Portability' messages, which basically means that the customer should be able to bring in and take out data from the cloud system as and when they want. Salesforce.com may not be able to offer 'Data Liberate/Portability,' and if they do so, Salesforce.com's business could collapse immediately."

But Salesforce.com CEO Marc Benioff suggested to analysts Thursday evening that they may be looking at the wrong metrics when thinking about the company. He said that tracking deferred revenue, a component of billings, isn't a great indicator of the company's health. A number of Salesforce.com's acquisitions — including Radian6 Technologies and Heroku — don't contribute to its deferred revenue account he said.

"It's not a great indicator of the performance of the company," he added. "All indications are that our business is going great."

The company provided guidance that its profits would be $0.30 to $0.40 a share in the quarter that ends in January, with revenue between $620 million and $624 million. The company expects revenue to be between $2.88 billion and $2.92 billion in its fiscal 2013.